ESG and Sustainability Reporting (Singular cause with different approach)

Divyanshu jaiswal

As the world is progressing the need for sustainability reporting increased multifold, and so each and every major accounting bodies in major countries and union committed to develop various framework and principles to make sure that companies have a uniform and a common set of rules and compliances that the eligible companies had to follow while preparing the reports on ESG. But, having multiple frameworks from multiple bodies makes understanding anything challenging and herculean task and hence this article will help you in understanding the major terminology used by companies in  ESG report.

ESG: ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities.

Environmental	Social	Governance
Conservation of the natural world	Consideration of people & relationships	Standards for running a company

SUSTAINABILITY REPORTING : Sustainability reporting is the disclosure and communication of environmental, social, and governance (ESG) goals—as well as a company’s progress towards them. Sustainability reporting and ESG may look similar to each other and there is only a thin line within each of them, but sustainability reporting takes into account other aspects along with ESG, in making a report of what the company is doing along with the ESG frameworks (we will discuss this topic in my next article).

GREEN WASHING: Green washing involves making an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly or have a greater positive environmental impact than they actually do.

STANDARDS: Standards are specific in their focus. They contain detailed criteria explaining what needs to be reported. In the context of ESG, this means standards dictate how information and data are collected, and how a report needs to be produced (what topics and business areas to include). Standards make frameworks more actionable by ensuring comparable, consistent, and reliable disclosure.

FRAMEWORK: A framework is broad in its scope, giving a set of principles to guide and shape understanding of a certain topic. An ESG framework will guide the direction of ESG reporting, but will not provide a methodology for the collection of information, data, or the reporting itself. The ESG framework is divided into 3 categories:

1. Voluntary disclosure frameworks,

2. Guidance frameworks,

3. Third-party aggregators.

VOLUNTARY DISCLOSURE FRAMEWORKS

Under this, a company actively discloses its sustainability-related policies, practices, performance data, and information related to ESG criteria. Few of the frameworks are discussed below,

Carbon Disclosure Project (CDP): The CDP asks for voluntary disclosures of non-financial data which includes greenhouse gas emissions (GHGs) and company environmental performance. The CDP framework focuses on water security, forest health and preservation, and an organization’s carbon footprint. Industry peers are used as a benchmark, as companies are scored and ranked publicly. This information is available to the public.

Global Real Estate Industry Benchmark (GRESB): The GRESB is a framework that’s used for buildings. GRESB asks for voluntary disclosures for building-related ESG data, assets, and real-estate portfolios. Results are publicly available.

Dow Jones Sustainability Indices (DJSI): The DJSI is another building-specific framework that provides a subscription-based survey of building-related ESG data, assets, and real estate portfolios. Again, results are publicly available.

GUIDANCE FRAMEWORKS

Guidance frameworks provide recommended methodologies and guidance to help companies identify, manage and report on their ESG performance. Below we’ve identified the most popular guidance frameworks, explaining each:

Sustainability Accounting Standards Board (SASB): The SASB provides voluntary frameworks that focus on financial substantive information that’s relevant to investors. The aim of the SASB is to provide information to the SEC, which investors can then use to compare business performance on critical ESG issues.

Global Reporting Initiative (GRI): The GRI voluntary disclosures are broad in their aim. These disclosures address a range of ESG topics that are deemed relevant to the organization and all related management approach components. Reporting principles cover the inclusiveness of stakeholders, sustainability, and integrity. GRI standards are divided into universal, sector, and topic-specific standards that can be applied to companies depending on their industry and impact.

Task Force on Climate-Related Financial Disclosures (TCFD): TCFD provides voluntary disclosures focused on target-related risks to financial systems. The TCFD was established in the wake of 2015’s COP21, with the aim of developing recommendations for more effective climate-related disclosures. TCFD recommendations are based on four thematic areas, which represent the core operating areas of a business: Governance, strategy, risk management, and metrics and targets. The impact climate change has on a business, plus the impact the business has on the climate, are both considered by TCFD.

Carbon Disclosure Standards Board (CDSB): This is an initiative of the CDP developed to create a holistic view of a company’s performance – according to an organization’s financial performance and impact on natural capital. The CDSB framework aims to standardize the reporting of environmental information. Collaboration on the most widely shared and tested reporting approaches supports this aim.

International Integrated Reporting Council (IIRC): The IIRC has been developed to accelerate the adoption of integrated reporting. To this end, the IIRC merged with SASB in 2021, producing the Value Reporting Foundation (VRF). The aim is to create a baseline for corporate sustainability disclosure that can be used around the world.

The International Financial Reporting Standards Foundations’ (IFRS): The International Sustainability Standards Board (ISSB), at its meeting on 16 February 2023 in Montreal, has taken its final decisions to release the new reporting standards by the end of Q2 2023, with companies beginning to issue disclosures against the standards in 2025. At the meeting, the ISSB agreed that its initial IFRS Sustainability Disclosure Standards, S1 and S2, will become effective starting January 2024. The ISSB also voted to include a reference to the GRI standards and the European Sustainability Reporting Standards (ESRS) as sources of guidance for companies to be allowed to consider in the application of the IFRS’ general sustainability reporting standard (“S1”), in the absence of a specific ISSB standard.

THIRD-PARTY AGGREGATORS

Third-party aggregators refer to frameworks that assess an organization’s performance based on aggregated, and publicly available data. Data is collected from company-sourced filings, publications, company websites, annual reports, and/or sustainability or CSR reports. Listed below are the main third-party aggregator players.

Bloomberg Terminal ESG Analysis: Public information displayed in annual and sustainability reports, CSR reports, and websites are aggregated and assessed. Data can only be accessed by those with a subscription.

Institutional Shareholder Services (ISS E&S) Quality Score (ISS): Sustainability and CSR reports, integrated reports, publicly available company policies, and information are aggregated and assessed. The results from these assessments are publicly available.

MSCI: MSCI aggregates data from 100+ specialized datasets from governments, NGOs, and models, plus company disclosures which include: Sustainability reports; proxy reports; 10-K reports (which provide a full description of a company’s annual financial activity), and 1,600 media sources. The aim of MSCI is to show a company’s exposure to ESG risks and how it compares to industry competitors. Subscriptions are needed for this data to be accessed.

Sustainalytics: Sustainalytics aggregates and assesses company data based on public company-sourced findings and media reports.

Now after understanding these terms lets understand how major economies are adapting to ESG.

The European union(EU): On 5 January 2023 the Corporate Sustainability Reporting Directive (CSRD) entered into force. This new directive modernises and strengthens the rules about the social and environmental information that companies have to report. A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability – approximately 50 000 companies in total.

Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS). The draft standards are developed by the EFRAG, previously known as the European Financial Reporting Advisory Group, The standards will be tailored to EU policies, while building on and contributing to international standardisation initiatives. The Commission should adopt the first set of standards by mid-2023, based on the draft standards published by EFRAG in November 2022.

The CSRD also makes it mandatory for companies to have an audit of the sustainability information that they report. In addition, it provides for the digitalisation of sustainability information.

India: In india the market regulator, Securities and Exchange Board of India (SEBI) introduced new requirements for sustainability reporting by the top-1000 listed Indian entities by market capitalization in a new format called the Business Responsibility and Sustainability Report (BRSR). The companies to which the new requirement applies need to disclose their material Environmental, Social, and Governance (ESG) risks and opportunities, their approach to mitigate the risks or adapt to them, and the financial implications involved in this process.

From the fiscal year 2022-23, compliance with BRSR requirements is mandatory for the top-1000 companies and voluntary for other listed companies, including those that have listed specified securities on the Small and Medium Enterprises (SME) exchange.

BRSR framework is divided into three sections. General disclosures, Management, and Process disclosure, and Principle-wise performance disclosures and is based on 9 basic principles of the National Guidelines on Responsible Business Conduct (NGRBC) which pertain to businesses being ethical, transparent, and accountable, provisioning goods and services in a sustainable manner, ensuring the well-being of employees – including those in their value chains, being protective of the environment and mindful of sustainable production, responsive to all stakeholders, promoting human rights, complying with the regulatory framework, promoting inclusive growth and facilitating equitable development and consumer welfare.

The united states of America (USA): In USA, the market regulator The SEC proposal was introduced in two parts.

1.The first part included 4 disclosure requirements:

• Governance of climate-related risks and climate risk management processes.
• Have any climate-related risks, as identified by the registrant, had or are likely to have a material impact on a business and short and long-term financial statements?
• Have any identified climate-related risks affected or are likely to affect the registrant’s strategy, business model, and outlook?
• The impact of climate-related events (severe weather events and other natural conditions) on the items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

2. The second part of the disclosure requirements focused on greenhouse gas emissions. Registrants would be required to disclose direct greenhouse emissions, which are known as scope 1, as well as indirect emissions from purchased energy, which are known as scope 2. A company would be required to report scope 3 emissions, which are GHG emissions from upstream and downstream activities if they have a set target or goal which includes these.

Well, this is all I have to offer today, thank you for being a patient reader, any comments or queries will be appreciated.

Thank you